Accounting update · Existing definition New definition A business consists of inputs and processes...

CIAA SWO Seminar March 5, 2020

Accounting update

CIAA Conference | Accounting update

PwC

Partner, Assurance

Introduction and welcomePwC presenters

Matt DensaManager, Assurance

Manager, Assurance

Winnie Reitzel

2

Scott Gilfillan


PwC

IFRS 3 Business combinations - Definition of a business

IFRS 16 Leases

IFRS 9 for Insurers

1

2

3

4

Accounting updateTopics of discussion

3

5 IFRIC 23 - Uncertainty over income taxes

IFRS 17 Insurance contracts - Updates and progress


PwC

1IFRS 17- Insurance contracts updates and progress


PwC

IFRS 17 timeline

¹ Deferral of final mandatory effective date for insurers to align with IFRS 17 effective date.

Project plan

Key d

ate

s a

nd

ac

tivit

ies

2017 2018 2019 2020 2021

Ad

op

tion

IFRS 17

(Insurance

contract liab.)

What Insurers

can do

IFRS 17 issued

in May

Effective date

01/01/2022

IFRS 9

(Financial

assets)IFRS 9 mandatory effective

2022 IFRS 9

effective date¹

Understand the impact and plan the project

Get organised

and educateTransition to the new standard

Design, implementation and

remediation

Prepare comparatives

2022

EU endorsement process

Exposure

draft of

proposed

amend-

ments

June 2019

121

comment

letters

received

in

Sept

Expected

finalisation of

amendments

Mid-2020

5

Decision on

deferral - March


PwC

Where are insurers in the IFRS 17 journey?PwC clients only

6


PwC

Canadian progress PwC clients only

7


PwC

IFRS 17

vendor

solution

Data Resources Stakeholders

● Readiness

● Taking the plunge

● Sprints

● Hooking up the

pipes

● Sources & storage

● Accelerators

● Constraints

● Onboarding new

team members

● Regulators

● Management

● Shareholders

● Home office

Accounting and regulatory updateSelected transition hot topics for P&C insurers

8


PwC

Operational issues for client – Potential approaches to implementing IFRS 17 differ depending on ambition level and desired target state

A

B

Modernisation

Compliance

plus

Compliance

Va

lue t

o th

e b

usin

ess

Costs and delivery risk

C

Path C – Basic compliance

Approach: Aim to identify and implement pragmatic solutions to ensure compliance

across the region by leveraging or extending existing capabilities with minimum

investment of time and resources.

Outcome: Lowest cost, low risk program to deliver auditable IFRS financial statements

and footnotes supported by new processes and controls and a Contract Service Margin

(CSM) solution.

Path B – Compliance plus

Approach: Aim to make targeted investments beyond those needed to achieve

basic compliance only on a “no regrets”, cost efficient basis in which tangible benefits can

be achieved with only minimal increase in overall delivery risk.

Outcome: Low risk, cost efficient program delivering auditable IFRS financial statements

and footnotes while also delivering targeted efficiency improvements in the overall

financial reporting cycle.

Path A – Finance and actuarial modernisation

Approach: Use IFRS 17 as an opportunity to modernise and optimise the finance

function by standardising and streamlining end-to-end finance processes and

applications with a focus on adding value back to the business. Embracing new

technologies, such as workflow management, analytics, cloud and robotics,

will be necessary.

Outcome: IFRS compliance and a future proof, technology enabled financial reporting

function driving business insights and value through the use of data visualisation and

advanced analytics.

9


PwC

Operational issues for clients – Practical impacts on your businessSome of your staff will need new skill sets to accommodate the changes of moving to IFRS 17

IFRS

17

Risk and

capital

Internal

audit

Investor

comm.

Board of

directors

Asset

mgmt.

Project

management

Human

resourcesLegal and

compliance

Products

Marketing

Actuarial

Finance

IT

Operation

10

High Impact

Moderate impact

QIS


PwC

Major factors impacting QIS

12

● What is meant by “best efforts”

● Risk adjustment and discount rate considerations

● Level of aggregation

● Impact of IFRS 9

● Expense vs. Incur acquisition cost


PwC

2 IFRS 9 for Insurers


PwC

IFRS

9Impairment “expected credit loss

model”2

Classification and measurement1

Hedging3

Accounting and regulatory updateIFRS 9—what to expect?

14


PwC

IFRS 9 classification & measurement

15


PwC

Interaction of IFRS 9 and IFRS 17OCI option and mismatches between assets and liabilities

Insurers will make an accounting policy choice on whether to apply the OCI option in IFRS 17 in

order to match profit or loss as much as possible with the results from assets.

Assets (IFRS 9) Liabilities (IFRS 17)

Considerations

FVTPL

FVOCI with no

recycling

Amortised cost

Discount rate changes to

P&L

Discount rate changes to

OCI

● CSM at locked in rate

● Debt assets sold prior to maturity

recycle gains/losses from AOCI to

PL

● Grouping of assets and liabilities

could be different

● OCI option available per portfolio

● Operational complexity to track

discount rate change if OCI used

for liabilities

FVOCI with

recycling

Equities, derivatives,

debt

instruments

Debt

instruments

Debt

instruments

Equities

16


PwC

Business modelChallenges encountered in determination of business models

Theoretical issues:

○ Understand the IFRS 9 business

model concept

○ Order in which to perform the BM

assessment and the SPPI

assessment

○ Permissible sales in “hold to collect”

business model (i.e. setting

thresholds)

Practical issues:

○ Lack of audit evidence

○ Assessment of the remuneration policy

can be challenging

○ Disconnection between persons

performing the assessment and the

portfolio’s manager

○ Business needs to be aware of the

accounting consequences of their

actions

17


PwC

SPPIChallenges encountered during SPPI test

Stratifying of

contracts to

homogeneous

groups

ControlsAutomated

SPPI tool

Availability

of the

information

Time

consuming

All clauses affecting

the cash flows must

be understood

Push back

from the

business

Consider all the

addendums,

annexes,

T&C, side

agreements…

18


PwC

3 IFRS 16 - Leases


PwC

IFRS 16 vs IAS 17

20

Issue IFRS 16 IAS 17

Balance sheet Right of use asset and lease liability for

all leases

● Operating leases: no asset/liability (only

accrual/prepayment)

● Finance lease: leased asset and lease

liability

Variable lease

payments

Part of the lease liability if they depend

on index/rate

Not part of the lease liability

Income statement ● Right of use asset: depreciation

● Lease liability: effective interest

rate method

● Operating leases:lease payments on a

straight-line basis

● Finance lease

○ Leased asset: depreciation

○ Leased liability: effective interest

rate method


PwC

4 IFRS 3 - Business combinations


PwC

IFRS

3Revision of definition of a business2

Effective Date1

Impact3

Accounting and regulatory update

22


PwC

Revision

23

Existing definition New definition

A business consists of inputs and processes applied

to those inputs that have the ability to create outputs,

although outputs are not required.

Definition does not provide a definition of when a

process is considered substantive.

Clarifies that, to be a business, an acquired set of

activities and assets must include an input and a

substantive process that together significantly

contribute to the ability to create outputs. Includes

guidance to determine whether a substantive process

has been acquired, as well as implementation

examples (including requirement for a set without

outputs to include an organized workforce).

A set of activities missing inputs or processes can be

a business if a market participant is capable of

continuing to produce outputs (i.e. by integrating with

existing processes).

Removed the need to assess whether market

participants are capable of replacing missing inputs or

processes and of continuing to produce outputs.


PwC

Revision

24

Existing definition New definition

Outputs are the results of inputs and processes that

provide or have ability to provide a return in the form of

dividends, lower costs or other economic benefits.

Narrowed definition of business and outputs by focusing

on providing goods or services to customers, or

generating investment or other income.

Removed reference to an ability to reduce cost

Concentration of value in single asset not assessed. Added optional concentration test to simplify

assessment.


PwC

The optional concentration test

If substantially all of the fair value of

the gross asset acquired is

concentrated in a single identifiable

asset, or a group of similar identifiable

assets, the concentration test is met

and the set of activities and assets is

considered not to be a business.

25

If the concentration test is met, no

further assessment is needed.


PwC

Asset

Concentration test:

Is substantially all of the fair

value

in one or similar assets?

Are there outputs?

No (or concentration test bypassed)

Yes

Process critical to produce outputs

and workforce acquired or

process is unique, scarce or cannot

be replaced without significant

cost/effort/delay?

Process critical to ability to

convert inputs and workforce

acquired and other input that

workforce can convert to outputs

acquired

AssetAsset

NoYes

NoNo

Business

Yes Yes

Accounting and regulatory updateDefinition of a business

26


PwC

5 IFRIC 23 - Uncertainty in income taxes


PwC

IFRIC 23

28

Definition Scope Treatment Disclosures


PwC

Example

Entity A completes its income tax filing and it

includes deductions related to transfer

pricing. The tax authorities may challenge

those tax treatments.

Entity A notes that the taxation authority’s

decision on one transfer pricing matter

would affect, or be affected by, the other

transfer pricing matters. Applying par 6 of

IFRIC 23, Entity A concludes that

considering the tax treatments of all transfer

pricing matters together better predicts the

resolution of the uncertainty.

29

Further, Entity A also predicts that it is not

probable that the taxation authority will accept

the tax treatments. As such, they reflect the

uncertainty in determining the taxable profit

(par 11 of IFRIC 23).


PwC

Estimate additional

amount of taxable

profit

Probability % Estimate expected

value

Outcome 1

Outcome 2

Outcome 3

Outcome 4

Outcome 5

Outcome 6

Conclusion?

30

0

5%200

05%

10

20%400 80

20%600 120

650100%

20%1000 200

30%800 240


PwC

Thank you.Are there questions that we can answer?


PwC

Scott Gilfillan

Partner, Insurance

Waterloo ON

T: 519 570 5743

[email protected]

Winnie Reitzel

Manager, Insurance

Waterloo ON

T: 519 570 5705

[email protected]

PwC contacts

Matt Densa

Manager, Insurance

Waterloo ON

T: 519 570 5704

[email protected]

32

pwc.com

© 2019 PwC. All rights reserved. Not for further distribution without the permission of PwC. “PwC” refers to the network of member firms of PricewaterhouseCoopers

International Limited (PwCIL), or, as the context requires, individual member firms of the PwC network. Each member firm is a separate legal entity and does not act as

agent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of its

member firms nor can it control the exercise of their professional judgment or bind them in any way. No member firm is responsible or liable for the acts or omissions of

any other member firm nor can it control the exercise of another member firm’s professional judgment or bind another member f irm or PwCIL in any way.

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Accounting update · Existing definition New definition A business consists of inputs and processes...

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